Market Commentary

The Japanese yen is strengthening after a report from Bloomberg news saying that Japanese officials are concerned that forex interventions will fail without the support of the U.S. government.

According to the Bloomberg report, three unnamed top government officials have said that the government would have trouble weakening the yen given the likely opposition from United States to join in the effort.

Nevertheless, two of the three unnamed officials said that additional volatility in the currency would likely be the trigger for government to begin selling the Japanese currency in a bid to weaken it.

In the minutes following the announcement, USD/JPY has sold off 19 pips to 84.15, edging near the intraday low of 83.67, and August 24 15-year high of 83.60.
 

The forex markets are essentially ignoring a very upbeat housing report from the United States.

Just moments ago, pending home sales advanced 5.2% month-over-month in July despite expectations for a 1.0% contraction and after falling 2.8% in June.

Annual sales were nevertheless down 20.1%, compared to a 20.3% contraction the month prior.

The lack of optimism from the markets suggests that traders are not taking the data points very seriously, given the growing view of a new wave of woes for the U.S. housing market.

Although the USD managed some minor gains against major currencies on the news, the moves were minor, and very short lived.

The markets also 0.1% monthly gain in July factory orders compared to a 0.2% consensus gain, and prior 0.6% contraction in June.

Nevertheless, factory orders are considered lower tier in the United States.

The FX markets are broadly ignoring comments from Fed Chairman Ben Bernanke saying that regulators could have done more to identify the potential housing crisis in the United States, and prevent one of the worst recession in decades. Speaking in testimony before the Financial Crisis Inquiry Commission, the central banker made no comments on current monetary policy or the economy, leaving forex traders with little new information to trade on. Otherwise, Bernanke continued to press for additional regulation to better help identify potential risks to the financial system, as well as resolving the too-big-to-fail problem in the United States, which caused the Federal government to spend billions to bail out firms like AIG.
 

The euro is seesawing on the back of news that the European Central Bank will increase measures to help the euro zone economy, by increasing the amount of lending it makes to financial institutions.

This morning, the ECB decided to extend its unlimited liquidity offerings into 2011, while indexing its three month loans to the 1.00% main refinancing rate.

Speaking to reporters following this morning’s decision to leave its benchmark interest rate unchanged at 1.00%, as expected, central bank president Jean-Claude Trichet added that the decision to link the interest rates on the loans to its benchmark rate is not a signal of an imminent change in policy.

Interest rates remain appropriate, he affirmed, adding that the lending facilities would be temporary in nature.

The central banker also repeated last month’s affirmation that economic growth in the euro zone was proving to be stronger than expected, with inflation expectations firmly anchored in the medium term.

Nevertheless, the risks, to growth remain on the downside, he added.

Trichet also announced revisions to the ECB’s economic forecasts, which now have growth in the 1.4% to 1.8% range for 2010 compared to a 0.7% to 1.3% growth range previously estimated. In 2011, growth is expected to rise between 0.5% to 2.3% versus a 0.2% to 2.2% pickup previously anticipated.

Meanwhile inflation is seen rising between 1.5% to 1.7% in 2010 versus a 1.4% to 1.6% range previously, and 2011 inflation rise between 1.2% to 2.2% versus a previous estimate of 1.0% to 2.2%.

The general take from this is that while the economy is indeed doing better than expected, the longer term prospects are mixed. Consequently, the ECB is worried about a possible growth slowdown.

As such, it makes sense for the euro to decline against majors, except that the markets had received a hint of possible further extraordinary measures when Bundesbank President Axel Weber told the markets that the ECB should consider extending the duration of these emergency loans into 2011.

Therefore it is not surprising that EUR/USD is once again near levels seen just before Trichet started speaking. The pair initially rose 40 pips as traders thought the decision to link the rate on those extra loans to the ECB’s main interest rates could be a signal of a rate hike to come.

Since Trichet clarified that the status quo remains on rates, EUR/USD has fallen 37 pips, close to pre-announcement levels.

All in all, the event seems to have been relatively in line with expectations, leaving traders free to focus on tomorrow’s nonfarm payrolls report from the U.S.
 

The FX reaction has been mixed in the aftermath of a slightly better than expected weekly jobless claims report from the United States.

Earlier this morning, the U.S. Labor Departed reported that initial jobless claims in the week ending August 28 declined to 472k, further than expectations for a decline to 475k from 478k. Continuing claims in the week ending August 21 fell to 4456k from 4479k, less than expectations for a 4450k level.

Although the news is relatively good for the economy, the results are nevertheless very close to the consensus forecast, giving limited scope for the forex markets to react materially.

In addition, this week’s report doesn’t correlate very with nonfarm payrolls, the critical U.S. employment statistic being released on Friday.

Consequently, EUR/USD and GBP/USD failed to show any significant reactions to the news, but in line with the optimism in the report, USD/JPY advanced 17 pips to 84.32.

On the other hand, the Canadian dollar capitalized on the prospects of stronger U.S. economy, with USD/CAD shedding a modest 31 pips to a new intraday low of 1.0472.

In recent day’s we’ve see the Canadian, Australian, and New Zealand dollar outperform the USD on the back of better than expected results from the U.S. economy, as traders seek riskier returns on those currencies. Meanwhile, the reactions against the euro, pound sterling, and yen have been fairly textbook, with upbeat economic data weakening the greenback against those currencies.